Documents found in this filing:

New Hampshire Thrift Bancshares, Inc. is the parent company of Lake Sunapee Bank, fsb, a federal stock savings bank
providing financial services throughout central and western New Hampshire.

The Bank encourages and supports the personal and professional development of its employees, dedicates itself to consistent service of the highest level for all customers, and recognizes its responsibility to be an
active participant in, and advocate for, community growth and prosperity.

The
year 2004 will serve as the beginning of a transitional period for the Company as the enabling economic environment of the last few years draws nearer to a close with each incremental rise in interest rates. The mortgage refinance boom that has
served as the primary growth tool for assets and earnings at financial institutions across the country since late in 2000 is all but over and community banks, such as ours, are now turning their attention back to the more traditional models of
building upon relationships and advancing into new markets. Lost to the psychology of the mind is the fact that the recent seven-year high in interest rates following a period of forty-year lows still makes for interest rates that are, then, at
thirty-three year lows, but the borrowers have now moved on, having refinanced more than once or twice along the way. Fully anticipating these market changes, the Company began, more than a year ago, to develop various strategies to help move us
forward building on opportunities diversifying products and services and developing a stronger leadership position in the various markets now being served by both our existing and new branch locations.

For the Company, more active balance sheet management strategies have been
employed to blend with and address the financial needs of the institution in meeting its longer term goals and objectives. By continuing to develop even closer connections to the communities served, it is most important for the Company to be
recognized for an unfailing attention to detail and the delivery of quality services that will add value for both our customers and our shareholders. Operating with a best practices mindset from the perspective of good corporate
governance, the task ahead, then, is to simply manage the business well, avoid complacency and remain focused on what is important, not just what is expected.

Due primarily to the Companys decision to redeem its $16,400,000 Trust Preferred Securities issuance of 1999 and, therefore, to incur the one-time
expense of certain unamortized costs, consolidated net earnings for the year ended December 31, 2004 were $5,098,093 or $1.20 per diluted share of common stock. This compares to net income of $5,771,453 or $1.42 per diluted share of common stock
that the Company reported for the year ended December 31, 2003. In addition to the expense associated with the trust preferred redemption, earnings were also negatively impacted by an alternative accounting treatment associated with a pre-existing
supplemental retirement plan. With the previously mentioned pressures on both interest income and interest expense, much more attention must now be paid to the development and implementation of techniques to further the profitability of the Company
through reliable and sustainable resources. Complete financial details for the year ending December 31, 2004 can be found in the Managements Discussion and Analysis section immediately following this letter.

The underpinnings of growing and developing shareholder value over the longer term are rooted in the fundamentals of
consistent asset quality, reliable sources of income and the periodic repositioning of the Companys broader strategic goals and objectives. The ability of an organization to remain flexible and adaptive as markets change is now seen in the
financial services industry as an avenue to better ensure the timely delivery of more refined products and services to meet newly evolving customer expectations. The financial benefits of community banking are sustained by the existence and
nurturing of shared values and the concept that doing what is right is always better than simply doing what is expected.

Adjusted for the recent two-for-one stock split, the Companys stock price ended the year 2004 at $16.50, having ranged from a low of $13.805 to a
high of $17.835 over the course of the year. Shareholders equity ended the year at $43,835,017 as compared to $39,124,596 at December 31, 2003. The number of common shares outstanding at the end of the year totaled 4,167,180 and the book value
per share stood at $10.52 as of December 31, 2004.

Additionally, the Company, at the January 2005 board meeting, authorized an increase in the quarterly dividend pay-out from an adjusted $.1125 per share to $.1250 per share, resulting in an annualized dividend of $.50 per share. This change
can be seen as representative of a belief that the Company can maintain its well-capitalized position, while at the same time provide sustainable levels of net income in the future.

more active balance sheet management strategies have been employed to blend with and address the financial needs of the institution
in meeting its longer term goals and objectives

As both the volume and pace of the Companys mortgage lending activities began to moderate during the third and fourth quarters of 2004, the need to
develop and craft a more comprehensive business plan evolved into a general dialogue about the future direction of the community banking industry. Clearly, with the financial benefits of the mortgage refinance boom now having run their course, the
business of banking has returned to its most basic tenants taking in deposits and lending out money. Growth, in all senses of the word, must now come from expanding both the products and services offered, as well as developing new markets.

The Company has identified three new branch locations that
either expand upon our existing presence in contiguous markets or move us into new areas where the type and style of personal service delivered are seen as being very well received. By mid-year 2005, new full service branches will be
open and operational in the New Hampshire communities of Peterborough, Enfield and Claremont. The Peterborough office, which is supported by a multi-year mortgage origination effort in that area, opened in January and has more than met our initial
expectations. Favorable comments are also being heard in the two other communities and we are anxious to have those offices fully operational in the second quarter.

Growing our financial services franchise is an important step toward developing a much broader base of sustainable
relationships to carry the institution forward, as well as helping to address the margin compression issue by expanding upon the volume of banking activity that can be handled without corresponding increases in expenses in the future. While the
initial costs to open and operate new offices will have a temporary dampening effect on periodic earnings, the longer term prospects for growth-derived net income more than outweigh this initial investment.

With the regions economy remaining strong and healthy, the Company is
better able to make strategic decisions that can bring forth more immediate and tangible results. The business of business continues to prosper and the Company maintains an ongoing effort to develop and refine a wide variety of offerings
to meet the needs of the retail consumer customers and the small business market segment, as well as the more seasoned demand for commercial lending opportunities.

Total assets of the Company stood at $595,514,082 at year end December 31, 2004 as compared to $526,246,231 at year end 2003. This represents a net
increase of nearly $70,000,000 over the course of the year and is primarily attributable to a corresponding growth in the loan portfolio that was supported by the leveraged use of advances from the Federal Home Loan Bank that grew from $22,000,000
to $75,000,000 during the year. With total deposits remaining almost flat for the year, it appears that there is now more interest by the investor-depositor in cautiously returning to the stock market as the opportunity (or missed opportunity) for
greater returns becomes more financially enticing.

The
Companys 10-year fixed-rate portfolio mortgage that was introduced at the end of 2003 has met with great success and, along with the more traditional adjustable rate mortgage programs and the commercial lending activities, helped to
significantly increase the outstanding loan portfolio. At December 31, 2004, the loan portfolio stood at $417,827,740 as compared to $348,471,365 at year end 2003. This change represents a net growth of almost 20% and establishes a new baseline from
which the Companys interest income from invested assets will grow in future periods. Additionally, the sold loan portfolio of just under $295,000,000 remained almost flat for the year as a direct result of the increase in interest rates and
the corresponding reduction in secondary market loan activity. The Company, as in the past, continues to retain the servicing rights on the majority of these loans in order to maintain a stream of income and to further develop the customer
relationships so crucial to the future of community banking.

Asset quality remains at historically high levels and the Company uses both internal and external audit functions for thorough review of the loan portfolio, as well as for the periodic review of various other segments of the Companys
operations. The additional burdens placed on financial

service providers to monitor and report on suspicious activity as a deterrent to potential terrorist activity remain
in place and regulatory compliance with the Bank Secrecy Act is of paramount concern across the industry.

The
heightened expectations that accompany todays daily business climate of operating within a best practices environment and the greater demands on corporate governance across the board all lead to the need for more personal
accountability throughout an organization. The Company takes these issues quite seriously and works to incorporate a sense of responsibility in all that we do. In a context of a community bank, this means a full recognition of the trust-based
relationship that develops between the bank and its customers. While larger banks have the distinct advantage of a greater geographical distribution, community banks focus on the needs of the local families and businesses they serve each and every
day. It is the nurturing of this partnership that drives and sustains the community bank.

Customer development and retention is a primary key to the Companys future success and merely satisfying a customers needs may just not be enough. There must now be a recognizable value embedded within the
relationship that transcends the simple rule of merely meeting a customers expectations. The personal banking approach that the Company provides its customers is based on a desire to, whenever possible, remove the
obstacles that may prevent the achievement of their goals. Individual attention, even when the answer may not be what the customer wants to hear, means being willing to take the time to explain why and to identify what may need to be
done to help them correct or better an existing situation.

We
remain committed to growing the Company in a consistent and sustainable manner, setting goals that can be realistically achieved and managing the business in such a way that success comes from quality not price. It is anticipated that the
Company will need to move further in the direction of developing a sales oriented culture that bases itself on the principle of whether or not a product or service is of value to the customer, not whether it is just good for the bank. It
is this value-added philosophy that will be, in the end, the Companys economic-driver and by consistently delivering on value the Company can expect to see the measured growth necessary to ensure the long-term
goals of increased profitability and the building of shareholder value.

The Company continues to seek out and identify
ways to further develop the enabling environment that has been created over the last few years in a dedicated effort to sustain a positive and progressive work force. Sharing the vision of where the Company is headed and why is an
important ingredient in maintaining a motivated team of employees who simply want to do their best.

On behalf of those who work so hard to strengthen the role of our banking franchise in all of the communities we serve, I want to again take this
opportunity to thank you our shareholders for your continuing confidence in, and support of, the Company. As we work to broaden both our product lines and our community presence, we remain steadfast in our desire to provide exceptional
banking services for the benefit of all our customers, our employees and our shareholders.

Stephen W. Ensign

Chairman of the Board,

President and Chief Executive Officer

community banks focus on the needs of the local families and businesses they serve
each and every day

New
Hampshire Thrift Bancshares, Inc.s (the Company) profitability is derived from its subsidiary, Lake Sunapee Bank, fsb (the Bank). The Banks earnings are primarily generated from the difference between the yield on
its loans and investments and the cost of its deposit accounts and borrowings. Loan origination fees, retail-banking service fees, and gains on security and loan transactions supplement these core earnings.

Total assets stood at $595,514,082 at December 31, 2004, an increase of $69,267,851 or 13.16%, from December 31, 2003.



Net loans increased $69,235,575, or 20.09%, to $413,808,290 at December 31, 2004 from $344,572,715 at December 31, 2003.



The Company earned $5,098,093 or $1.20 per common share, assuming dilution, for the year ended December 31, 2004, compared to $5,771,453, or $1.42 per common share, assuming
dilution, for the year ended December 31, 2003.



Earnings were negatively impacted by a one-time, non-recurring, pre-tax expense in the amount of $758,408 resulting from the redemption of the Companys $16,400,000 of Trust
Preferred Securities.



During 2004, the Bank sold $67.5 million in loans to the secondary market, realizing gains on those sales of $595,231, as compared to 2003, when the Bank sold $173.0 million in
loans to the secondary market, realizing gains on those sales of $3,420,714. A slow-down in mortgage loan refinancings contributed to the decrease.



The Banks servicing portfolio increased to $293,569,964 at December 31, 2004 from $289,825,192 at December 31, 2003, an increase of $3,744,772 or 1.29%, due to a slow-down of
loan pre-payments.



The Banks interest rate spread increased to 3.48% as of December 31, 2004, compared to 3.43%, as of December 31, 2003.



The Company financed two trust preferred securities issuances each in the amount of $10 million, whose proceeds were used to redeem an existing trust preferred security issuance in
the amount of $16,400,000.



In 2004, the Bank originated over $282.2 million in loans, compared to over $380.1 million in 2003. The slow-down in refinancings accounted for the decrease.



On February 7, 2005, the Company announced a two-for-one stock split which was effected in the form of a 100% stock dividend.

The preceding and following discussion may contain certain forward-looking
statements, which are based on managements current expectations regarding economic, legislative, and regulatory issues that may impact the Companys earnings in future periods. Factors that could cause future results to vary materially
from current management expectations include, but are not limited to: general economic conditions, changes in interest rates, deposit flows, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in
legislation or regulation; and other economic, competitive, governmental, regulatory and technological factors affecting the Companys operations, pricing, products and services. In particular, these issues may impact managements
estimates used in evaluating market risk and interest rate risk in its gap analysis and Net Portfolio Value (NPV) tables, loan loss provisions, classification of assets, accounting estimates and other estimates used throughout this discussion. The
Company disclaims any obligation to subsequently revise any forward-looking statements, or to reflect the occurrence of anticipated or unanticipated events.

The allowance for loan losses is established through a charge to the
provision for loan losses. Provisions are made to reserve for estimated losses in outstanding loan balances. The allowance for loan losses is a significant estimate and is regularly reviewed by the Company for adequacy by assessing such factors as
changes in the mix and volume of the loan portfolio; trends in portfolio credit quality, including delinquency

and charge-off rates; and current economic conditions that may affect a borrowers ability to repay. The Companys methodology with respect to the
assessment of the adequacy of the allowance for loan losses is more fully discussed on pages 15-17 of Managements Discussion and Analysis.

The Company must estimate income tax expense for each period for which a statement of operations is presented. This involves estimating the Companys
actual current tax exposure as well as assessing temporary differences resulting from differing treatment of items, such as timing of the deduction of expenses, for tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the Companys consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and to the extent that recovery is not likely, a
valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of December 31, 2004, there were no valuation allowances set aside against any
deferred tax assets.

Interest on loans is included in income as earned based upon interest rates
applied to unpaid principal. Interest is not accrued on loans 90 days or more past due. Interest is not accrued on other loans when management believes collection is doubtful. All loans considered impaired are nonaccruing. Interest on nonaccruing
loans is recognized as payments are received when the ultimate collectibility of interest is no longer considered doubtful. When a loan is placed on nonaccrual status, all interest previously accrued is reversed against current-period interest
income.

On August 12, 1999, NHTB Capital Trust I (Trust I), a Delaware
business trust formed by the Company, completed the sale of $16.4 million of 9.25% Capital Securities. Trust I also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of 9.25% Junior
Subordinated Deferrable Interest Debentures (Debentures I) of the Company. Debentures I was the sole asset of Trust I and was eliminated, along with the related income statement effects, in the consolidated financial statements. The
Company contributed $15.0 million from the sale of Debentures I to the Bank as Tier I Capital to support the acquisition of the three branches of the New London Trust Company (NLTC). Total expenses associated with the offering,
approximating $900,000, were included in other assets and were amortized on a straight-line basis over the life of Debentures I.

The Capital Securities I accrued and paid distributions quarterly at an annual rate of 9.25% of the stated liquidation amount of $10 per Capital Security.
The Company had fully and unconditionally guaranteed all of the obligations of Trust I. The guaranty covered the quarterly distributions and payments on liquidation or redemption of Capital Securities I, but only to the extent that Trust I had funds
necessary to make these payments.

Capital Securities I were
mandatorily redeemable upon the maturing of Debentures I on September 30, 2029 or upon earlier redemption as provided in the Indenture. The Company had the right to redeem Debentures I, in whole or in part on or after September 30, 2004 at the
liquidation amount plus any accrued but unpaid interest to the redemption date. On September 30, 2004, the Company redeemed Capital Securities I in its entirety and incurred a one-time, non-recurring expense in the amount of $758,408 in unamortized
expenses resulting from the origination of Capital Securities I.

On March 30, 2004, NHTB Capital Trust II (Trust II), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of 6.06%, 5 Year Fixed-Floating Capital Securities (Capital Securities
II). Trust II also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of 6.06% Junior Subordinated Deferrable Interest Debentures (Debentures II) of the Company. Debentures
II are the sole assets of Trust II. The Company used the proceeds to redeem the securities issued by Trust I, which were callable on September 30, 2004. Total expenses associated with the offering of $160,402 are included in other assets and are
being amortized on a straight-line basis over the life of Debentures II.

Capital Securities II accrue and pay distributions quarterly at an annual rate of 6.06% for the first 5 years of the stated liquidation amount of $10 per Capital Security. The Company has fully and unconditionally
guaranteed all of the obligations of the Trust. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that the Trust has funds necessary to make these payments.

Capital Securities II are mandatorily redeemable upon the maturing of Debentures II on March 30, 2034
or upon earlier redemption as provided in the Indenture. The Company has the right to redeem Debentures II, in whole or in part on or after March 30, 2009 at the liquidation amount plus any accrued but unpaid interest to the redemption date.

On March 30, 2004, NHTB Capital Trust III (Trust
III), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (Capital Securities III). Trust III also issued common
securities to the Company and used the net proceeds from the offering to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (Debentures III) of the Company. Debentures III are the sole assets of Trust III. The
Company used a portion of the proceeds to redeem the balance of securities issued by Trust I, which were callable on September 30, 2004. The balance of the proceeds of Trust III is being used for general corporate purposes. Total expenses associated
with the offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of Debentures III.

Capital Securities III accrue and pay distributions quarterly based on the stated liquidation amount of $10 per Capital Security. The Company has fully
and unconditionally guaranteed all of the obligations of Trust III. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities III, but only to the extent that Trust III has funds necessary to
make these payments.

Capital Securities III are mandatorily
redeemable upon the maturing of Debentures III on March 30, 2034 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem Debentures III, in whole or in part on or after March 30, 2009 at the liquidation amount
plus any accrued but unpaid interest to the redemption date.

On October 2, 2000, the Bank and two
other New Hampshire banks acquired Charter Holding Corp. (CHC) and Phoenix New England Trust Company (PNET) from Phoenix Home Life Mutual Insurance Company of Hartford, Connecticut. Contemporaneous with the acquisition, CHC and PNET merged under the
continuing name of Charter Holding Corp. with assets of approximately $1.7 billion under management. As a result of the acquisitions and merger, at a cost of $3,003,337 each, the Bank and each of the other two banks own one-third of CHC.
Headquartered in Concord, New Hampshire, CHC provides trust and investment services from more than a dozen offices across New Hampshire, as well as one in Norwich, Vermont. The Bank purchased CHC as a means to provide trust and investments services
as well as insurance products to the Banks customers. By doing so, the Bank anticipates non-interest income to be enhanced. For the years ended December 31, 2004 and December 31, 2003, the Bank realized $155,278 and $81,489, respectively, in a
realized gain. The Bank has entered into an agreement with Charter New England Agency (CNEA), a subsidiary of CHC, which enables the Bank to sell brokerage, securities, and insurance products. For the years ended December 31, 2004 and December 31,
2003, the Bank generated commissions in the amount of $192,617 and $108,818, respectively.

Total assets increased by $69,267,851 or 13.16%, from $526,246,231 at December 31, 2003 to $595,514,082 at December 31, 2004. Cash and Federal Home Loan Bank overnight deposit increased $3,017,610. Net loans receivable and loans
held-for-sale increased by $69,661,035, or 20.17%, to $415,103,290 at December 31, 2004 from $345,442,255 at December 31, 2003.

Total gross loans, excluding loans held-for-sale, increased $68,993,108 or 19.88%, to $416,079,726 at December 31, 2004 from $347,086,618 at December 31,
2003. The increase was attributed to increases of $54,996,866, or 19.17%, in real estate mortgage loans (including conventional and commercial). The Banks promotion of a fixed rate, ten year amortizing and a seven year hybrid loans generated
the majority of this increase. Consumer loans increased $13,568,600, or 30.92%, to $57,449,583 due to a demand for the Banks Home Equity Line of Credit product. The continued low interest rate environment made the above loan offerings very
attractive. Sold loans totaled $293,569,964 at year-end 2004, compared to $289,825,192, at year-end 2003. The Bank expects to continue to sell fixed rate loans into the secondary market, retaining the servicing, in order to manage interest rate risk
and control growth. Typically, the Bank holds adjustable rate loans in portfolio. Adjustable rate mortgages comprise approximately 82% of the Banks real estate mortgage loan portfolio, which is consistent with prior years.

The amortized cost of investment securities decreased $5,120,621, or 4.13%, from $123,888,403 at
December 31, 2003 to $118,767,782 at December 31, 2004. The Bank used the proceeds from maturing investment securities to fund loan demand.

The Bank realized gains on the sales and calls of securities in the amount of $392,813 during 2004, compared to $227,687 in 2003. At December 31, 2004,
the Banks investment portfolio had a net unrealized loss of $226,471, compared to a net unrealized gain of $122,494 at December 31, 2003. As interest rates increased during 2004, the value of the Banks investment portfolio
decreased. However, since the average life of the investment portfolio is less than five years and the liquidity of the Bank remains strong, the Bank does not anticipate the need to prematurely sell any investments and realize a loss.

Real estate owned and property acquired in settlement of loans
remained at $0 at December 31, 2004 and 2003.

Total deposits
increased by $4,595,033 or 1.07%, to $433,071,580 at December 31, 2004, from $428,476,547 at December 31, 2003. Time deposits and money market accounts decreased by $24.1 million, or 13.26%, to $157.3 million as customers sought higher returns in
non-bank alternatives and the Bank elected not to match higher-yielding deposit products at other banks. These decreases were offset by increases in the Banks core deposits of checking (non-interest-bearing) and savings accounts in the amount
of $28.6 million, or 11.59% to $275.8 million. The percentage of the Banks core deposits to total deposits increased from 57.68% at December 31, 2003 to 63.69% at December 31, 2004.

Advances from the Federal Home Loan Bank (FHLB) increased by $53,000,000, or 240.91%, to $75,000,000 at December 31, 2004
from $22,000,000 at December 31, 2003. The Bank used the proceeds from the advances to fund loan demand. The weighted average interest rate at December 31, 2004 for the outstanding FHLB advances was 2.53%.

The Bank is required to maintain sufficient liquidity for safe and sound
operations. At year-end 2004 the Banks liquidity was sufficient to cover the Banks anticipated needs for funding loan commitments of approximately $17.2 million. The Banks source of funds comes primarily from net deposit inflows,
loan amortizations, principal pay downs from loans, sold loan proceeds, and advances from the FHLB. At December 31, 2004 the Bank had approximately $100,000,000 in additional borrowing capacity from the FHLB.

At December 31, 2004, the Companys shareholders equity totaled
$43,835,017, compared to $39,124,596 at year-end 2003. The increase of $4,710,421 reflects net income of $5,098,093, the payment of $1,859,333 in common stock dividends, the exercise of 149,800 stock options in the amount of $1,397,998, a tax
benefit on the exercise of stock options of $284,403, and a decrease in net unrealized holding gain on securities available-for-sale of $210,740.

On February 22, 2001, the Company announced a stock repurchase program. Repurchases will be made from time to time at the discretion of management. The
stock repurchase program will continue until the repurchase of 124,000 shares are repurchased. As of December 31, 2004, 59,500 shares of common stock had been repurchased. During 2004, no shares were repurchased. The Board of Directors of the
Company has determined that a share buyback is appropriate to enhance shareholder value because such repurchases generally increase earnings per share, return on average assets and on average equity; three performing benchmarks against which bank
and thrift holding companies are measured. The Company buys stock in the open market whenever the price of the stock is deemed reasonable and the Company has funds available for the purchase.

As of December 31, 2004, the Company had funds in the amount of $5,530,876
available, which it plans to use for stockholder dividend payments and to pay interest on the Companys capital securities. The Company increased the quarterly dividend by $.0125, or 11.11%, effective with the January 30, 2005 payment. The
common stock dividend and capital securities interest payments are approximately $3.1 million per year. The Bank pays dividends to the Company as its sole stockholder, within guidelines set forth by the Office of Thrift Supervision (OTS). Since the
Bank is well capitalized and has capital in excess of regulatory requirements, funds will be available to cover the Companys future dividend, interest, and stock repurchase needs.

Net cash provided by operating activities decreased by $692,185 to $9,263,976 in 2004 from $9,956,161 in 2003. A
decrease in net income in the amount of $673,360 was offset by the write-off of expenses due to prepayment of debentures held by Trust I in the amount of $758,408. Changes associated in loans-held for-sale, mortgage servicing rights, and

accrued interest receivable were caused by the slow-down of mortgage loan refinancings.

Net cash flows used in investing activities totaled $68,563,105 in 2004 compared to $69,212,941 in 2003, a change of
$649,836. During 2004, the Bank utilized proceeds from financing activities to fund loan originations, net, in the amount of $66,031,932.

In 2004, net cash flows from financing activities totaled $62,316,739 compared to $24,395,600 in 2003, a change of $37,921,139. The Bank utilized the
proceeds from advances provided by the FHLB to fund loan demand.

The Bank expects to be able to fund loan demand and other investing activities during 2005 by continuing to use funds provided by customer deposits, as well as the FHLBs advance program. On December 31, 2004, approximately $17.2
million in commitments to fund loans had been made. Management is not aware of any trends, events, or uncertainties that will have or that are reasonably likely to have a material effect on the Companys liquidity, capital resources or results
of operations.

The following table represents the Companys contractual
obligations at December 31, 2004:

Payments Due by Period (in thousands)

Total

Less than 1 year

1-3 years

3-5 years

More than 5 years

Long-term Debt Obligation

$

40,000

$



$

20,000

$



$

20,000

Operating Lease Obligation

878

260

378

192

48

Total

$

40,878

$

260

$

20,378

$

192

$

20,048

The OTS requires that
the Bank maintain tangible, core, and total risk-based capital ratios of 1.50%, 4.00%, and 8.00%, respectively. As of December 31, 2004, the Banks ratios were 7.87%, 7.87%, and 12.04%, respectively, well in excess of the OTS requirements.

Book value per share was $10.52 at December 31, 2004 versus
$19.48 per share at December 31, 2003.

The financial statements and related data presented
elsewhere herein are prepared in accordance with generally accepted accounting principles (GAAP) which require the measurement of the Companys financial position and operating results generally in terms of historical dollars and current market
value, for certain loans and investments, without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations.

Unlike other companies, nearly all of the assets and liabilities of a bank
are monetary in nature. As a result, interest rates have a far greater impact on a banks performance than the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the
price of goods and services, since such prices are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Banks assets and liabilities are important to the maintenance of acceptable
performance levels.

The principal objective of the Banks interest rate management function
is to evaluate the interest rate risk inherent in certain balance sheet accounts and determine the appropriate level of risk given the Banks business strategies, operating environment, capital and liquidity requirements and performance
objectives and to manage the risk consistent with the Board of Directors approved guidelines. The Banks Board of Directors has established an Asset/Liability Committee (ALCO) to review its asset/liability policies and interest rate
position monthly. Trends and interest rate positions are reported to the Board of Directors monthly.

Gap analysis is used to examine the extent to which assets and liabilities are rate sensitive. An asset or liability is said to be interest
rate sensitive within a specific time-period if it will mature or reprice within that time. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specified period
of time and the amount of

interest-bearing liabilities maturing or repricing within the same specified period of time. The strategy of matching rate sensitive assets with similar
liabilities stabilizes profitability during periods of interest rate fluctuations.

The Banks one-year gap at December 31, 2004, was 6.10%, compared to the December 31, 2003 gap of 25.59%. During 2004, the Bank removed the decay component from its NOW account deposits because NOW
accounts no longer experience rate sensitivity and behave similar to non-interest-bearing checking accounts. This accounts for the difference in the Banks one-year gap from 2004 to 2003. If the Bank had removed industry decay formulae for the
gap reported as of December 31, 2003, the adjusted gap would have been 4.56%. If interest rates were to rise, the Banks spread would be reduced because the cost to re-finance the FHLB advances would increase prior to any asset
re-pricing.

The Bank continues to offer adjustable rate
mortgages, which reprice at one, three, and five-year intervals. In addition, the Bank sells fixed-rate mortgages to the secondary market in order to minimize interest rate risk.

The Banks one-year gap, of approximately negative 6.10% at December 31, 2004, means net interest income would increase
if interest rates trended downward. The opposite would occur if interest rates were to rise.

As another part of its interest rate risk analysis, the Bank uses an interest rate sensitivity model, which generates estimates of the change in the Banks net portfolio value (NPV) over a range of interest rate
scenarios. The Office of Thrift Supervision (OTS) produces the data quarterly using its own model and data submitted by the Bank.

NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The NPV ratio, under any rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the same scenario. Modeling changes require making certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to the changes in
market interest rates. In this regard, the NPV model assumes that the composition of the Banks interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured and that a particular
change in interest rates is reflected uniformly across the yield curve. Accordingly, although the NPV measurements and net interest income models provide an indication of the Banks interest rate risk exposure at a particular point in time,
such measurements are not intended to and do not provide a precise forecast of the effect of changes in market rates on the Banks net interest income and will likely differ from actual results.

Net interest income for the year ended December 31, 2004, increased by $3,009,299 or 19.10%, to $18,767,334. The increase was due to the continuing
low interest rate environment and the increase in loans outstanding.

Total interest and dividend income increased by $3,790,892 or 17.64%. Interest and fees on loans increased $2,293,149, or 12.89%, to $20,087,762 in 2004, due to the increase in loans outstanding.

Interest on taxable investments increased by $1,462,875, or 41.28%.
Dividends increased by $58,884, or 73.69%, to $138,797. Interest on other investments decreased $24,016, or 31.97%, to $51,100, as the Bank deployed these funds into other investments and loans.

Total interest expense increased $781,593, or 13.63%, for the year
ended December 31, 2004. Interest on deposits decreased by $844,071, or 20.90% because the Banks term deposits matured and re-priced into lower yielding term deposits. In addition, the Bank was able to lag the re-pricing of certain
deposit products and delay increases on deposit rates. Interest on FHLB advances increased by $1,147,352, or 2,160.13%, to $1,200,467 for the year ended December 31, 2004 from $53,115 for the year ended December 31, 2003. FHLB advances
increased from $22,000,000 at December 31, 2003 to $75,000,000 at December 31, 2004 as the Bank used the proceeds from the advances to fund loan growth.

The Banks overall cost of funds decreased from 1.35% in 2003 to 1.29% in 2004. The cost of deposits, including repurchase agreements, decreased 20
basis points from 1.02% in 2003 to 0.82% in 2004. The Banks time deposits, in particular, rolled into term deposits with lower rates or transferred into more liquid savings or checking accounts.

The Banks interest rate spread, which represents the difference between
the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, increased to 3.48% at December 31, 2004 from 3.43% at December 31, 2003. The Banks net interest margin, representing net
interest income as a percentage of average interest-earning assets, increased to 3.54% from 3.50%. Both increases are the result of the Banks ability to lag rate increases on certain deposit products.

The following table sets forth the average yield on loans and investments, the average
interest rate paid on deposits and borrowings, the interest rate spread, and the net interest rate margin:

The following table presents, for the years indicated, the total dollar amount of interest income from
interest-earning assets and the resultant yields as well as the interest paid on interest-bearing liabilities, and the resultant costs:

Years ended December 31,

2004

2003

2002

Average (1)

Balance

Interest

Yield/Cost

Average (1)Balance

Interest

Yield/Cost

Average (1)

Balance

Interest

Yield/Cost

($ in thousands)

Assets:

Interest-earning assets:

Loans (2),

$

391,541

$

20,088

5.13

%

$

334,041

$

17,795

5.33

%

$

333,592

$

20,910

6.27

%

Investment securities and other

138,156

5,197

3.76

%

115,608

3,699

3.20

%

100,023

4,223

4.22

%

Total interest-earning assets

529,697

25,285

4.77

%

449,649

21,494

4.78

%

433,615

25,133

5.80

%

Noninterest-earning assets:

Cash

16,024

13,553

17,378

Other noninterest-earning assets (3)

40,317

37,502

35,142

Total noninterest-earning assets

56,341

51,055

52,520

Total

$

586,038

$

500,704

$

486,135

Liabilities and Shareholders Equity

Interest-bearing liabilities:

Savings, NOW and MMAs

$

292,351

$

1,183

0.40

%

$

277,968

$

1,370

0.49

%

$

252,719

$

3,193

1.26

%

Time deposits

106,027

2,013

1.90

%

116,354

2,669

2.29

%

134,796

5,314

3.94

%

Repurchase agreements

11,492

154

1.34

%

9,165

96

1.05

%

15,683

269

1.72

%

Capital securities and other borrowed funds

94,100

3,168

3.37

%

20,942

1,601

7.64

%

16,400

1,547

9.43

%

Total interest-bearing liabilities

503,970

6,518

1.29

%

424,429

5,736

1.35

%

419,598

10,323

2.46

%

Noninterest-bearing liabilities:

Demand deposits

28,161

30,170

28,793

Other

12,001

9,647

6,896

Total noninterest-bearing liabilities

40,162

39,817

35,689

Shareholders equity

41,906

36,458

30,848

Total

$

586,038

$

500,704

$

486,135

Net interest rate spread

$

18,767

3.48

%

$

15,758

3.43

%

$

14,810

3.34

%

Net interest margin

3.54

%

3.50

%

3.42

%

Ratio of interest-earning assets to interest-bearing liabilities

105.10

%

105.94

%

103.34

%

(1)

Monthly average balances have been used for all periods. .

(2)

Loans include 90-day delinquent loans, which have been placed on a non-accruing status. Management does not believe that
including the 90-day delinquent loans in loans caused any material difference in the information presented.

(3)

Other noninterest-earning assets include non-earning assets and other real estate owned.

The following table sets forth, for the years indicated, a summary of the changes in interest earned and interest
paid resulting from changes in volume and rates. The net change attributable to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate.

Lake Sunapee Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. Adjustments to the
allowance for loan losses are charged to income through the provision for loan losses. The Bank tests the adequacy at least quarterly by preparing a worksheet applying loss factors to outstanding loans by type. The worksheet stratifies the loan
portfolio by loan type and assigns a loss factor to each type based on an assessment of the inherent risk associated with each type. In determining the loss factors, the Bank considers historical losses and market conditions. Loss factors may be
adjusted for qualitative factors that, in managements judgment, affect the collectibility of the portfolio. No changes were made to the Banks procedures with respect to maintaining the loan loss allowances as a result of any regulatory
examinations.

The allowance for loan losses incorporates the
results of measuring impairment for specifically identified non-homogenous problem loans in accordance with Statement of Financial Accounting Standards (SFAS) No. 114 Accounting by creditors for impairment of a loan, and SFAS No. 118,
Accounting by creditors for impairment of a loan  income recognition and disclosures. In accordance with SFAS No.s 114 and 118 the specific allowance reduces the carrying amount of the impaired loans to their estimated fair
value. A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the contractual terms of the loan. Measurement of impairment can be based on the present value of expected cash flows
discounted at the loans effective interest rate, the market price of the loan, or the fair value of the collateral if the loan is collateral dependent.

Measurement of impairment does not apply to large groups of smaller balance homogenous loans such as residential mortgage, home equity, or installment
loans that are collectively evaluated for impairment. Please refer to Note 4 Loans Receivable, in the Consolidated Financial Statements for information regarding SFAS No. 114 and 118.

The Banks commercial loan officers review the financial condition of
commercial loan customers on a regular basis and perform visual inspections of facilities and inventories. The Bank also has loan review, internal audit, and compliance programs. Results are reported directly to the Audit Committee of the
Banks Board of Directors.

At December 31, 2004 the
allowance for loan losses was $4,019,450 compared to $3,898,650 at year- end 2003. The increase resulted from the combination of provisions and recoveries during the year. The allowance represented 0.97% of total loans at year-end 2004 compared to
1.12% at year-end 2003. The decline is due to the $69 million increase in the loan portfolio. The Bank charged-off $14,737 in 2004 compared to $86,642 in 2003. The provision for loan losses was $74,997 compared to $99,996 in 2003. Non-performing
loans declined $865,000, which resulted in the allowance for loan losses as a percentage of total non-performing loans increasing from 337% at December 31, 2003 to 1,372% at December 31, 2004. The improved loan quality and results of the allowance
adequacy tests drove the decision to reduce the provision despite the portfolio growth.

Loans classified for regulatory purposes as loss, doubtful, substandard or special mention, do not result from trends or uncertainties that the Bank reasonably expects will materially impact future operating results,
liquidity, or capital resources.

Total classified assets,
excluding special mention loans, as of December 31, 2004 and 2003 were $5,196,123 and $4,046,955, respectively. Total non-performing loans and real estate owned amounted to $293,203 and $1,157,957 for the respective years. Non-performing loans
consist of loans 90 days or more past due and non-accrual impaired loans. The decline in non-performing loans came primarily from the liquidation of one residential mortgage loan that was included with loans over 90 days past due at December 31,
2003. Non-accrual impaired loans were $49,394 on December 31, 2004 and $50,934 on December 31, 2003. As of December 31, 2004 the Bank also held $853,064 in restructured loans on accrual status and performing, included in impaired loans; compared to
$726,698 at December 31, 2003. Loans 90 days or more past due were $243,809 at the end of 2004 and $1,107,023 at the end of 2003. Loans 30 to 89 days past due were $2,705,154 and $3,397,736, respectively at December 31, 2004 and 2003. If all
non-accruing loans had been current in accordance with their terms during the years ended December 31, 2004 and 2003, interest income on such loans would have amounted to approximately $7,000 and $54,000, respectively.

As of December 31, 2004 there were no other loans not included in the tables
below or discussed above where known information about possible credit problems of the borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms and which may result in disclosure of
such loans in the future.

The following table sets forth the allocation of the loan loss allowance, the percentage of allowance to the total
allowance and the percentage of loans in each category to total loans as of December 31 ($ in thousands):

2004

2003

2002

Real estate loans -

Conventional

$

2,445

61

%

77

%

$

2,405

62

%

78

%

$

2,763

71

%

80

%

Construction

265

7

%

5

%

251

6

%

4

%

207

5

%

5

%

Collateral and consumer loans

109

3

%

14

%

114

3

%

13

%

155

4

%

10

%

Commercial and municipal loans

1,058

26

%

4

%

1,012

26

%

5

%

723

19

%

5

%

Impaired loans

142

3

%

117

3

%

28

1

%

Allowance

$

4,019

100

%

100

%%

$

3,899

100

%

100

%%

$

3,876

100

%

100

%

Allowance as a percentage of total loans

0.97

%

1.12

%

1.21

%

2001

2000

Real estate loans -

Conventional

$

2,421

55

%

82

%

$

2,457

55

%

80

%

Construction

176

4

%

5

%

176

4

%

3

%

Collateral and consumer loans

132

3

%

7

%

139

3

%

10

%

Commercial and municipal loans

1,273

29

%

6

%

1,446

33

%

7

%

Impaired loans

293

7

%

130

3

%

Other

110

2

%

85

2

%

Allowance

$

4,405

100

%

100

%

$

4,433

100

%

100

%

Allowance as a percentage of total loans

1.29

%

1.26

%

The Bank believes the
current allowance for loan losses is at a level sufficient to cover losses in the loan portfolio, given present conditions. At the same time, the Bank recognizes the determination of future loss potential is inherently uncertain. Future adjustments
to the allowance may be necessary if economic, real estate, and other conditions differ substantially from the current operating environment resulting in increased levels of non-performing loans and substantial differences between estimated and
actual losses.

Total noninterest income decreased $2,256,010, or 35.64%, to
$4,074,567 for 2004. Net gains on sales of loans decreased by $2,825,483, or 82.60%, accounting for 125.24% of the total decrease in noninterest income. As mentioned above, the increase in net interest and dividend income in the amount of
$3,009,299 offset the decrease in the net gains on the sales of loans. The Bank sold approximately $67.5 million of loans into the secondary market during 2004. Customer service fees increased by $203,348, or 10.90%, as the Bank was
able to reduce waived fees in a more efficient manner, thus increasing the collection of overdraft fees, monthly service charges, and ATM fees. The realized gain in Charter Holding Corp. increased by $73,789, or 90.55%, to $155,278 from
$81,489. The gain represents the Banks one-third interest in Charter Trust.

Total noninterest expenses increased $1,794,660, or 14.12%, to $14,505,301 for 2004.



Salaries and employee benefits increased by $975,005, or 16.77%, to $6,789,734 for 2004, from $5,814,729 for 2003. Gross salaries and benefits paid increased
by $80,544, or 0.98%, to $8,341,404 for 2004, compared to $8,260,860 for 2003. Normal salary and benefit increases were offset by decreased commissions associated with the decrease in the origination of loans. The deferral of expenses in conjunction
with the

Advertising and promotion increased in the amount of $63,757, or 26.04%, to $308,643, as the Bank took advantage of the low interest rate environment to heavily promote both
its fixed-rate mortgage loan products and its low-cost transaction-type deposit offerings. In addition, advertising expenses associated with the opening of a new branch office in Peterborough, NH were also incurred.



Outside services increased by $138,336, or 30.71%, to $588,772, due to expenses incurred for data processing, payroll and employee recruitment, and a conversion to a new
brokerage clearing-house provider.



Amortization of mortgage servicing rights (MSR) in excess of mortgage servicing income decreased in the amount of $389,911, or 65.17%, to $208,376 due to the decreased volume
of prepayments on mortgage loans serviced for others. The Bank amortizes MSRs collected over a five-year period and because higher than normal prepayments occurred during 2003 due to high refinancings, the unamortized portion of the MSRs was
required to be expensed.



Write-off of issuance cost due to prepayment of debenturesamounted to $758,408 in 2004 compared to $0 in 2003. As mentioned above, the Company refinanced its Capital
Trust Preferred Securities (Trust I) in the amount of $16.4 million with an interest rate of 9.25%. Trust I was replaced with similar securities with a weighted average rate of 5.04%. Total expenses associated with the offering of Trust
I, approximating $900,000 were being amortized on a straight-line basis over the life of Trust I. The write-off amount of $758,408 represents the remaining amortization of those expenses. The Company expects to save approximately $500,000 in annual,
pre-tax interest expense due to the refinance.



Professional services increased in the amount of $22,513, or 4.47%, to $526,055 for 2004, compared to $503,542 for 2003, due to expenses incurred in complying with the
provisions of the Sarbanes-Oxley Act regarding the internal documentation and testing of internal controls.



ATM expenses increased in the amount of $122,430, or 36.52%, to $457,700 for 2004, compared to $335,270 for 2003. Increased usage and fees associated with debit card
transactions contributed to the increase. These expenses were offset by ATM fees in the amount of $686,155, which are included in customer service fees.



Other expenses increased in the amount of $61,988, or 3.00%, to $2,128,170 for 2004, from $2,066,182 for 2003, due to normal increases in postage and telephone usage.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS No. 150).

In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the
assets, liabilities and activities of another entity. In December 2003, the FASB revised Interpretation No. 46, also referred to as Interpretation 46 (R) (FIN 46(R)).

In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-3 (SOP 03-3)
Accounting for Certain Loans or Debt Securities Acquired in a Transfer.

The provision for income taxes for the years ended December 31, 2004, 2003, and 2002, includes net deferred income tax expense of $378,216, $1,046,854,
and $811,907, respectively. These amounts were determined by the deferred method in accordance with generally accepted accounting principles for each year.

The Bank has provided deferred income taxes on the difference between the provision for loan losses permitted for income tax purposes and the provision
recorded for financial reporting purposes.

In 2003, the Company
earned $5,771,453, or $1.42 per common share, assuming dilution, compared to $4,299,988 or $1.09 per common share, assuming dilution, in 2002. The increase in earnings was primarily due to the increase in the net gain on the sale of loans in
the amount of $1,217,454. During 2003, the Banks loan originations amounted to $380.1 million, compared to $231.5 million in 2002 as refinancings increased. The Banks sold loan portfolio increased to $289.8 million at December 31, 2003
from $260.8 million at December 31, 2002.

Total assets increased by $29,601,308, or 5.96%, from
$496,644,923 at December 31, 2002 to $526,246,231 at December 31, 2003.

Total gross loans, excluding loans held-for-sale, increased $27,220,646 or 8.51%, from $319,865,972 at December 31, 2002 to $347,086,618 at December 31, 2003. The increase was attributed to an increase of $18,665,369 or 10.05%
conventional real estate mortgage loans. The Banks promotion of a fixed rate, ten year amortizing and a seven year hybrid product generated the majority of this increase. Consumer loans increased $11,625,347, or 36.04%, to $43,880,983 due to a
demand for the Banks Home Line of Credit product. The continued low interest rate environment made the above loan offerings very attractive. Sold loans totaled $289,825,192 at year-end 2003, compared to $260,774,730 for the same period in
2002. Adjustable rate mortgages comprise approximately 79% of the Banks real estate mortgage loan portfolio, which is consistent with prior years.

The amortized cost of investment securities increased $40,665,238, or 48.86%, from $83,223,165 at December 31, 2002 to $123,888,403 at December 31, 2003.
The Bank took the proceeds of the sale of loans, used Federal Funds Sold, and advances in the amount of $22,000,000 from the FHLB and invested these funds into mortgage-backed securities and U.S. Government Agencies. The Bank took advantage of the
favorable interest rates on the FHLB advances and invested the proceeds of the advances in higher yielding securities.

The Bank realized gains on the sales and calls of securities in the amount of $227,687 during 2003, compared to $146,473 in 2002. At December 31, 2003,
the Banks investment portfolio had an unrealized gain of $122,494, compared to a net unrealized gain of $233,331 at December 31, 2002. The relatively small unrealized gain for 2003 reflects the short-term duration of the Banks investment
portfolio. The majority of holdings carry final or callable maturities of less than five years, which tends to reduce market price volatility.

Real estate owned and property acquired in settlement of loans decreased by a net of $20,668 for the year ended December 31, 2002 to $0 at December
31, 2003.

Deposits decreased by $851,873, or 0.20%, to
$428,476,547 at December 31, 2003 from $429,328,420 at December 31, 2002. During 2002, customers sought the safety and predictability of insured deposits because of the instability being experienced in the financial markets. Time deposits and money
market accounts decreased by $15,323,871, or 7.77%, to $181,836,545 as customers sought higher returns in non-bank alternatives. These decreases were offset by increases in the Banks core deposits of checking (non-interest-bearing) and savings
accounts in the amount of $14,171,999, or 6.23% to $246,640,003, or 57.56% of total deposits. A marketing campaign conducted by the Bank to attract core accounts contributed in the increase. At December 31, 2003, time deposits comprised 25.39% of
total deposits versus 26.59% for the same period in 2002.

Advances from the FHLB increased by $22,000,000 for the year ended December 31, 2003 from zero at December 31, 2002. The Bank employed a leverage strategy and took advantage of the favorable interest rates on the FHLB advances by
investing the proceeds of the advances in higher yielding securities.

Net interest and dividend income for the year ended December 31, 2003, increased by $947,718 or 6.40%, to
$15,758,035. The increase was primarily due to the continuing low interest rate environment and the Banks negative gap position. As interest rates have fallen, more liabilities (deposits) have re-priced into falling rates, thus reducing the
Banks cost of funds at a faster pace than its income on earning assets. The Banks interest rate spread increased by 2.69% to 3.43% and the Banks interest margin increased by 2.34%. These increases were driven by a sharp decrease of
53.21% in the Banks cost of deposits. The Banks overall cost of funds decreased by 45.12% compared to a decrease of 17.59% in the Banks yield on loans and investments.

Total interest and dividend income decreased by $3,639,644 or 14.48%. Lower interest rates accounted for the majority
of the decrease in interest and fees on loans. Interest and fees on loans decreased $3,115,175, or 14.90%, to $17,794,613 in 2003, due to a decrease in yield from 6.27% for the year ended December 31, 2002 to 5.33% for the year ended December
31, 2003.

Interest and dividends on investments
decreased by $524,469, or 12.42%, due to a drop in yield from 4.22% to 3.20%, or 24.17%. Several higher-yielding callable agency bonds were called and the proceeds were re-invested in lower yielding securities. Also during 2002, the Bank
repositioned its investment portfolio in order to shorten maturities and, as a result, higher yielding, long-term bonds were liquidated and replaced by lower yielding, short-term investments.

Total interest expense decreased $4,587,362, or 44.44%, for the year
ended December 31, 2003. Interest on deposits decreased by $4,467,581, or 52.52% because the Banks deposits re-priced into lower rates. Interest on FHLB advances increased by $53,115 for the year ended December 31, 2003 compared
to $0 in 2002 as the Bank took advantage of favorable interest rates on the advances and invested the proceeds of the advances in higher yielding securities.

The Banks overall cost of funds decreased from 2.46% in 2002 to 1.35%, or 45.12%. The cost of deposits, including repurchase agreements, decreased
from 2.18% in 2002 to 1.02% in 2003, or 53.21%. The Banks certificates of deposit, in particular, rolled into lower rates or transferred into more liquid savings or checking accounts.

The Banks interest rate spread, which represents the difference between
the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, increased to 3.43% for the year ended December 31, 2003 from 3.34% for the year ended December 31, 2002. The Banks net
interest margin, representing net interest income as a percentage of average interest-earning assets, increased to 3.50% from 3.42%. Both increases are the result of falling interest rates.

The allowance for loan losses at December 31, 2003 was $3,898,650, compared
to $3,875,708 at year-end 2002. During 2003, the Bank had net charge-offs of $77,054 compared to net charge-offs and write-downs of $649,677 in 2002. The lower amount in 2003 is primarily due to $604,686 in write-downs taken prior to the sale of
non-performing loans in 2002. The provision for loan losses was $99,996 in 2003 compared to $120,000 in 2002. The allowance represented 1.12% of total loans at year-end 2003 versus 1.21% at year-end 2002. The increase in the allowance resulted from
provisions and recoveries exceeding loan charge-offs in 2003.

Total classified loans, excluding special mention loans, as of December 31, 2003 and 2002 were $4,046,955 and $3,333,767, respectively. Total non-performing loans amounted to $1,157,957 and $684,760 for the respective years. Non-performing
loans include loans 90 days or more past due, which were $1,107,023 at December 31, 2003 and $558,738 at the end of 2002. The increase in non-performing loans was largely due to one residential mortgage loan that was over 90 days past due at
year-end 2003. At December 31, 2003 and 2002 the respective amount of impaired loans was $777,632 and $105,354, respectively. At December 31, 2003 the impaired loan amount included $726,698 of performing loans that remained on accrual status. Loans
30 to 89 days delinquent were $3,397,736 at December 31, 2003 compared to $4,542,125 at year-end 2002.

Total noninterest income increased $1,365,918, or 27.51%, to $6,330,577 for 2003. Net gains on sales of loans increased by $1,217,454, or
55.26%, accounting for 89.13% of the total increase in noninterest income. The Bank sold approximately $173 million of loans into the secondary market during 2003. Customer service fees increased by $146,711, or 8.53%, as the Bank was able to
reduce waived fees in a more efficient manner, thus increasing the collection of overdraft fees, monthly service charges, and ATM fees. The realized gain in

Charter Holding Corp. (CHC) decreased by $31,935, or 28.16%, to $81,489 for the year ended December 31, 2003, from $113,424 for the year ended
December 31, 2002. The gain represents the Banks one-third interest in Charter Trust.

Total noninterest expenses decreased $169,052, or 1.31%, to $12,710,641 for the year ended December 31, 2003, from $12,879,693 for the year ended December 31, 2002.



Salaries and employee benefits decreased $788,253, or 11.94%, to $5,814,729 for the year ended December 31, 2003, compared to $6,602,982 for the year ended December 31, 2002.
Gross salaries and benefits paid decreased by $69,162, or 0.83%, to $8,260,860 for the year ended December 31, 2003, compared to $8,330,022 for the year ended December 31, 2002. Normal salary adjustments, commission increases associated with the
increased origination of loans, and the costs associated with the Banks employee incentive program were mitigated by a one-time insurance re-imbursement generated from the Banks self-funded group health insurance program. These increases
were offset by the deferral of expenses in the amount of $2,446,131 for the year ended December 31, 2003, compared to $1,727,040 for the year ended December 31, 2002, a change of $719,091.



Occupancy expenses decreased by $102,973, or 4.35%, to $ 2,264,909, due to several pieces of equipment being fully depreciated during 2003.



Advertising and promotion increased in the amount of $19,620, or 8.71%, to $ 244,886, as the Bank took advantage of the low interest rate environment to heavily promote both
its fixed-rate mortgage loan products and its low-cost transaction-type deposit offerings.



Professional services increased by $21,925, or 4.55%, to $503,542 for the year ended December 31, 2003.



Outside services increased by $100,476, or 28.71%, to $450,436 for the year ended December 31, 2003, due to expenses paid to several consultants used by the Bank for data
processing and accounting services.



ATM expenses increased in the amount of $75,006, or 28.82%, to $335,270 for the year ended December 31, 2003, compared to $260,264 for the year ended December 31, 2002.
Increased usage and fees associated with Debit card transactions contributed to the increase. These expenses were offset by fees derived from ATM usage, which are included in customer service fees.



Amortization of mortgage servicing rights (MSR) increased in the amount of $412,806, or 222.56%, to $598,287 for the year ended December 31, 2003, due to the accelerated
amortization costs caused by the increased volume of prepayments on mortgage loans. The Bank amortizes MSRs collected over a five-year period. Because higher than normal prepayments occurred during 2003 due to high refinancings, the unamortized
portion of the MSRs was required to be expensed.



Other expenses increased in the amount of $34,706, or 1.71%, to $2,066,182 for the year ended December 31, 2003, as compared to $2,031,476 for the year ended December 31,
2002.

The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Companys financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

We have audited the accompanying consolidated balance sheets of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of income, changes in shareholders' equity, cash
flows and comprehensive income for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2004 and 2003 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of America.

Common stock, $.01 par value, per share: 5,000,000 shares authorized, 4,167,180 shares issued and outstanding as of December 31, 2004 and
2,542,908 shares issued and 2,008,690 shares outstanding as of December 31, 2003

41,672

25,429

Paid-in capital

16,308,031

19,510,646

Retained earnings

27,622,080

24,404,156

Accumulated other comprehensive (loss) income

(136,766

)

73,974

43,835,017

44,014,205

Treasury stock, at cost, 534,218 shares as of December 31, 2003



(4,889,609

)

Total shareholders equity

43,835,017

39,124,596

Total liabilities and shareholders equity

$

595,514,082

$

526,246,231

The accompanying notes
are an integral part of these consolidated financial statements.

Nature of operations - New Hampshire Thrift Bancshares, Inc. (Company) is a savings association holding company headquartered in Newport, New
Hampshire. The Companys subsidiary, Lake Sunapee Bank, fsb (Bank), a federal stock savings bank operates fourteen branches primarily in Grafton, Sullivan, and Merrimack Counties in west central New Hampshire. Although the Company has a
diversified portfolio, a substantial portion of its debtors abilities to honor their contracts is dependent on the economic health of the region. Its primary source of revenue is providing loans to customers who are predominately small and
middle-market businesses and individuals.

Use of estimates
in the preparation of financial statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Principles of consolidation - The
consolidated financial statements include the accounts of the Company, the Bank, NHTB Capital Trust I, Lake Sunapee Group, Inc. (LSGI) which owns and maintains all buildings and Lake Sunapee Financial Services Corp. (LSFSC) which was formed to
handle the flow of funds from the brokerage services. LSGI and LSFSC are wholly-owned subsidiaries of the Bank. NHTB Capital Trust I, a subsidiary of the Company, was formed to sell capital securities to the public. All significant intercompany
accounts and transactions have been eliminated in consolidation.

NHTB Capital Trust II and NHTB Capital Trust III, subsidiaries of the Company, were formed to sell capital securities to the public through a third party trust pool. In accordance with FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), the subsidiaries have not been included in the consolidated financial statements.

Cash and cash equivalents - For purposes of reporting cash flows, the Company considers cash and due from banks and Federal Home Loan Bank
overnight deposit to be cash equivalents. Cash and due from banks as of December 31, 2004 and 2003 includes $4,738,000 and $4,342,000, respectively which is subject to withdrawal and usage restrictions to satisfy the reserve requirements of the
Federal Reserve Bank.

Securities available-for-sale -
Available-for-sale securities consist of bonds, notes, debentures, and certain equity securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of
shareholders equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Declines that are other than temporary in the fair value of individual
available-for-sale securities below their cost result in write-downs of the individual securities to their fair value. There were no write-downs for the years ended 2004, 2003 and 2002, respectively.

Securities held-to-maturity - Bonds, notes and debentures which the
Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts recognized in interest income using the interest method over the period to maturity. Declines that are other than temporary in
the fair value of individual held-to-maturity securities below their cost result in write-downs of the individual securities to their fair value. No write-downs have occurred for securities held-to-maturity.

Investment in Charter Holding Corp. - As of December 31, 1999, the Company had an investment
of $79,999 in the common stock of Charter Holding Corp. (CHC). This investment was included in other investments on the consolidated balance sheet and was accounted for under the cost method of accounting for investments. On October 2, 2000, the
Bank and two other New Hampshire banks acquired CHC and Phoenix New England Trust Company (PNET) from the Phoenix Home Life Mutual Insurance Company of Hartford, Connecticut. Contemporaneous with the acquisition, CHC and PNET merged under the
continuing name of Charter Holding Corp. with assets of approximately $1.7 billion under management. As a result of the acquisitions and merger, at an additional cost of $3,033,337 each, the Bank and each of the other two banks own one-third of CHC.
Headquartered in Concord, New Hampshire, CHC provides trust and investment services from more than a dozen offices across New Hampshire, as well as one in Norwich, Vermont. Charter New England Agency, a subsidiary of CHC, provides life insurance,
fixed and variable annuities and mutual fund products, in addition to full brokerage services through a broker/dealer affiliation with W.S. Griffith Inc., a wholly owned subsidiary of PM Holdings.

Goodwill resulting from the acquisition was pushed down to the
financial statements of CHC.

The Bank uses the equity method
of accounting to account for its investment in CHC. An investor using the equity method initially records an investment at cost. Subsequently, the carrying amount of the investment is increased to reflect the investors share of income of the
investee and is reduced to reflect the investors share of losses of the investee or dividends received from the investee. The investors share of the income or losses of the investee is included in the investors net income as the
investee reports them. Adjustments similar to those made in preparing consolidated financial statements, such as elimination of intercompany gains and losses, also are applicable to the equity method.

At December 31, 2004 and 2003 the carrying amount of the Companys
investment in CHC equalled the amount of the Banks underlying equity in the net assets of CHC.

Loans held-for-sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. No losses have been recorded.

Nonaccrual loans - Residential real estate loans and consumer loans are placed on nonaccrual status when they become 90 days past due. Commercial
loans are placed on nonaccrual status when they become 90 days past due or when it becomes probable that the Bank will be unable to collect all amounts due pursuant to the terms of the loan agreement. When a loan has been placed on nonaccrual
status, previously accrued interest is reversed with a charge against interest income on loans. Interest received on nonaccrual loans is generally booked to interest income on a cash basis. Residential real estate loans and consumer loans generally
are returned to accrual status when they are no longer over 90 days past due. Commercial loans are generally returned to accrual status when the collectibility of principal and interest is reasonably assured.

Allowance for loan losses - The allowance for loan losses is
established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.

The
allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant
revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value,
and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment
record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the
loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify
individual consumer and residential loans for impairment disclosures.

Deferred loan origination fees - Loan origination, commitment fees and certain direct origination costs are deferred, and the net amount is being amortized as an adjustment of the related loans yield. The Company is amortizing
these amounts over the contractual life of the related loans.

Loan servicing - For loans sold after December 31, 1995 with servicing retained, the Company recognizes as separate assets from their related loans the rights to service mortgage loans for others, either through acquisition of those
rights or from the sale or securitization of loans with the servicing rights retained on those loans, based on their relative fair values. To determine the fair value of the servicing rights created, the Company uses the market prices under
comparable servicing sale contracts, when available, or alternatively uses a valuation model that calculates the present value of future cash flows to determine the fair value of the servicing rights. In using this valuation method, the Company
incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost of servicing loans, the discount rate, ancillary income, prepayment speeds and default rates.

The cost of mortgage servicing rights is amortized in proportion to,
and over the period of, estimated net servicing revenues. Refinance activities are considered in estimating the period of net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the interest rate risk characteristics of the underlying loans. The amount of
impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.

Concentration of credit risk - Most of the Companys business activity is with customers located within the state. There are no concentrations
of credit to borrowers that have similar economic characteristics. The majority of the Companys loan portfolio is comprised of loans collateralized by real estate located in the state of New Hampshire.

Premises and equipment - Company premises and equipment are stated at
cost, less accumulated depreciation. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Estimated lives are 5 to 40 years for buildings and premises and 3 to 15 years for furniture,
fixtures and equipment. Expenditures for replacements or major improvements are capitalized; expenditures for normal maintenance and repairs are charged to expense as incurred. Upon the sale or retirement of company premises and equipment, the cost
and accumulated depreciation are removed from the respective accounts and any gain or loss is included in income.

Investment in real estate - Investment in real estate is carried at the lower of cost or estimated fair value. The buildings are being depreciated
over their useful lives. The properties consist of two buildings that the Company rents for commercial purposes. Rental income is recorded in income when received and expenses for maintaining these assets are charged to expense as incurred.

Real estate owned and property acquired in settlement of loans - The Company classifies loans
as in-substance, repossessed or foreclosed if the Company receives physical possession of the debtors assets regardless of whether formal foreclosure proceedings take place. At the time of foreclosure or possession, the Company records the
property at the lower of fair value minus estimated costs to sell or the outstanding balance of the loan. All properties are periodically reviewed and declines in the value of the property are charged against income.

Earnings per share - Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share, if applicable, reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Advertising - The Company directly expenses costs associated with advertising as they are incurred.

Income taxes - The Company recognizes income taxes under the asset and
liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Companys assets and liabilities at enacted tax rates expected to be in
effect when the amounts related to such temporary differences are realized or settled.

Fair value of financial instruments - The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Loans receivable - For
variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit
liabilities - The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed term money-market
accounts and certificates of deposits (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank advances - Fair values for Federal Home Loan Bank advances are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a
schedule of aggregated expected monthly maturities on Federal Home Loan Bank advances.

Securities sold under agreements to repurchase - The carrying amounts of securities sold under agreements to repurchase approximate their fair values.

Junior subordinated debentures and subordinated debentures - Fair
values of the guaranteed preferred beneficial interests in junior subordinated debentures are based on the quoted market prices of the NHTB Capital Trust I Capital Securities. Fair values of subordinated debentures are estimated using discounted
cash flow analyses, using interest rates currently being offered for debentures with similar terms.

Off-balance sheet instruments - Fair values for loan commitments have not been presented as the future revenue derived from such financial
instruments is not significant.

Stock based compensation - At December 31, 2004, the Company has four fixed stock-based
employee compensation plans which are described more fully in Note 10. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost has been recognized for its fixed stock option plans. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Stock-Based Payments, to stock-based employee compensation.

For the years ended December 31,

2004

2003

2002

Net income, as reported

$

5,098,093

$

5,771,453

$

4,299,988

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects



652,078

324,178

Pro forma net income

$

5,098,093

$

5,119,375

$

3,975,810

Earnings per share:

Basic - as reported

$

1.23

$

1.46

$

1.10

Basic - pro forma

$

1.23

$

1.29

$

1.02

Diluted - as reported

$

1.20

$

1.42

$

1.09

Diluted - pro forma

$

1.20

$

1.26

$

1.01

Recent Accounting
Pronouncements - In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities (SFAS No. 149), which amends and
clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement (a) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (b) clarifies when a derivative contains a financing component, (c) amends the definition of
an underlying to conform to language used in FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (d) amends certain other
existing pronouncements. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. There was no substantial impact on the Companys consolidated financial statements on adoption of this Statement.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). This Statement establishes standards for the classification and measurement of certain financial instruments
with characteristics of both liabilities and equity. SFAS No. 150 requires that certain financial instruments that were previously classified as equity must be classified as a liability. Most of the guidance in SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This Statement did not have any material effect on the Companys
consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In
December 2003, the FASB revised Interpretation No. 46, also referred to as Interpretation 46 (R) (FIN 46(R)). The objective of this interpretation is not to restrict the use of variable interest entities but to improve financial
reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. This interpretation
changes that, by requiring a variable interest entity to be consolidated by a company only if that company is subject to a majority of the risk of loss from the variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. The Company is required to apply FIN 46, as revised, to all entities subject to it no later than the end of the first reporting period ending after March 15, 2004. However, prior to the required application of
FIN 46, as revised, the Company shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be special-purpose entities as of the end of the first fiscal year or interim period ending after December 15, 2003. The adoption of this
interpretation did not have a material effect on the Companys consolidated financial statements.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits - an
amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106 (SFAS No. 132 (revised 2003)). This Statement revises employers disclosures about pension plans and other postretirement benefit plans. It does not change the measurement
or recognition of those plans required by SFAS No. 87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits, and SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in SFAS No. 132, Employers Disclosures About Pensions
and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement 132 about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. The adoption of this Statement did not have a material
impact on the Companys consolidated financial statements.

In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-3 (SOP 03-3) Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP
03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality be recognized at their fair value. The excess of contractual
cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Valuation allowances cannot be created nor carried over in the initial accounting for loans acquired in a
transfer on loans subject to SFAS 114, Accounting by Creditors for Impairment of a Loan. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004, with early adoption encouraged. The Company does not
believe the adoption of SOP 03-3 will have a material impact on the Companys financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payments (SFAS 123R). This Statement revises FASB
Statement No. 123, Accounting for Stock Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R requires that the cost resulting from
all share-based payment transactions be recognized in the consolidated financial statements. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. This Statement is effective for the Company as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. The Company does not believe the adoption of this Statement will have a material impact on the Companys financial position or results of operations.

In August, 1999, NHTB Capital Trust I (Trust I), a wholly owned subsidiary of the Company, sold capital securities to the public. The capital
securities sold consisted of 1,640,000 9.25% Capital Securities I with a $10.00 liquidation amount for each capital security, for a total of $16,400,000. The capital securities were fully guaranteed by the Company. Each capital security paid a
cumulative quarterly distribution at the annual rate of 9.25% of the liquidation amounts. Each capital security represented an undivided preferred beneficial interest in the assets of Trust I. Trust I used the proceeds of the above sale and the
proceeds of the sale of its common securities to the Company to buy $16,907,300 of 9.25% subordinated debentures (Debentures I) issued by the Company. These Debentures I were due to mature on September 20, 2029. The Debentures I had the
same financial terms as the capital securities. The Company made interest payments and other payments under Debentures I to Trust I. The Companys obligations under the Debentures I were unsecured and ranked junior to all of the Companys
other borrowings, except borrowings that by their terms ranked equal or junior to the subordinated debentures. The Company guaranteed the payment by Trust I of the amounts that were required to be paid on the capital securities, to the extent that
Trust I had funds available for such payments.

Trust I were
mandatorily redeemable upon the maturing of Debentures I on September 30, 2029 or upon earlier redemption as provided in the Indenture. The Company had the right to redeem Debentures I, in whole or in part on or after September 30, 2004 at the
liquidation amount plus any accrued but unpaid interest to the redemption date. On September 30, 2004, the Company redeemed Capital Securities I in its entirety and recognized $758,408 in unamortized offering expenses resulting from the issuance of
Capital Securities I.

On March 30, 2004, NHTB Capital Trust II
(Trust II), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of 6.06%, 5 Year Fixed-Floating Capital Securities (Capital Securities II). Trust II also issued common securities to the
Company and used the net proceeds from the offering to purchase a like amount of 6.06% Junior Subordinated Deferrable Interest Debentures (Debentures II) of the Company. Debentures II are the sole assets of Trust II. The Company used the
proceeds to redeem the securities issued by Trust I, which were callable on September 30, 2004. Total expenses associated with the offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of
Debentures II.

Capital Securities II accrue and pay
distributions quarterly at an annual rate of 6.06% for the first 5 years of the stated liquidation amount of $10 per Capital Security. The Company has fully and unconditionally guaranteed all of the obligations of the Trust. The guaranty covers the
quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that the Trust has funds necessary to make these payments.

Capital Securities II are mandatorily redeemable upon the maturing of Debentures II on March 30, 2034 or upon earlier
redemption as provided in the Indenture. The Company has the right to redeem Debentures II, in whole or in part on or after March 30, 2009 at the liquidation amount plus any accrued but unpaid interest to the redemption date.

On March 30, 2004, NHTB Capital Trust III (Trust III), a
Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (Capital Securities III). Trust III also issued common securities to
the Company and used the net proceeds from the offering to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (Debentures III) of the Company. Debentures III are the sole assets of Trust III. The Company used a
portion of the proceeds to redeem the balance of securities issued by Trust I, which were callable on September 30, 2004. The balance of the proceeds of Trust III are being used for general corporate purposes. Total expenses associated with the
offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of Debentures III.

Capital Securities III accrue and pay distributions quarterly based on the stated liquidation amount
of $10 per Capital Security. The Company has fully and unconditionally guaranteed all of the obligations of Trust III. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities III, but only to
the extent that Trust III has funds necessary to make these payments.

Capital Securities III are mandatorily redeemable upon the maturing of Debentures III on March 30, 2034 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem Debentures III, in whole or in part on or
after March 30, 2009 at the liquidation amount plus any accrued but unpaid interest to the redemption date.

NOTE 3.

Securities:

Debt and equity securities have been classified in the consolidated balance sheets according to managements intent.

The amortized cost of securities and their approximate fair values are
summarized as follows:

Amortized

Cost

Gross

UnrealizedGains

Gross

UnrealizedLosses

Fair

Value

Available-for-sale:

December 31, 2004:

Bonds and notes -

U. S. Government, including agencies

$

30,079,787

$

3,697

$

214,421

$

29,869,063

Mortgage-backed securities

72,065,872

335,994

509,496

71,892,370

Other bonds and debentures

16,137,737

112,229

55,288

16,194,678

Equity securities

484,386

100,814



585,200

Total available-for-sale

$

118,767,782

$

552,734

$

779,205

$

118,541,311

December 31, 2003:

Bonds and notes -

U. S. Government, including agencies

$

39,059,281

$

291,004

$

63,344

$

39,286,941

Mortgage-backed securities

58,009,781

151,236

540,819

57,620,198

Other bonds and debentures

23,333,810

290,200

43,897

23,580,113

Equity securities

484,386

38,114



522,500

Total available-for-sale

$

120,887,258

$

770,554

$

648,060

$

121,009,752

Held-to-maturity:

December 31, 2003:

Bonds and notes -

Other bonds and debentures

$

3,001,145

$

73,200

$

11,145

$

3,063,200

Total held-to-maturity

$

3,001,145

$

73,200

$

11,145

$

3,063,200

For the years ended
December 31, 2004, 2003 and 2002, proceeds from sales of debt securities available-for-sale amounted to $28,635,547, $36,241,623 and $28,873,099, respectively. Gross gains of $369,494, $265,794 and $1,075,473, and gross losses of $8,757, $55 and
$929,000, were realized during 2004, 2003 and 2002, respectively, on sales of available-for-sale debt securities. The tax provision applicable to these net realized gains amounted to $142,888, $105,259 and $58,018, respectively. There were no sales
of available-for-sale equity securities during 2004, 2003 and 2002.

Maturities of debt securities, excluding mortgage-backed securities, classified as available-for-sale
are as follows as of December 31, 2004:

Fair Value

U.S. Government, including agencies

$

5,493,907

Total due in less than one year

$

5,493,907

U.S. Government, including agencies

$

24,375,156

Other bonds and debentures

12,774,604

Total due after one year through five years

$

37,149,760

Other bonds and debentures

$

1,542,774

Total due after five years through ten years

$

1,542,774

Other bonds and debentures

$

1,877,300

Total due after ten years

$

1,877,300

There were no
securities of issuers which exceeded 10% of shareholders equity as of December 31, 2004.

Securities, carried at $99,226,273 and $94,395,722 were pledged to secure public deposits, the treasury, tax and loan account and securities sold under agreements to repurchase as of December 31, 2004 and 2003,
respectively.

The aggregate fair value and unrealized losses
of securities that have been in a continuous unrealized-loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, are as follows as of December 31, 2004:

Less than 12 Months

12 Months or Longer

Total

Fair

Value

UnrealizedLosses

Fair

Value

UnrealizedLosses

Fair

Value

UnrealizedLosses

Bonds and notes -

U.S. Government, including agencies

$

23,836,563

$

214,421

$



$



$

23,836,563

$

214,421

Mortgage-backed securities

16,190,946

105,811

22,226,361

403,685

38,417,307

509,496

Other bonds and debentures

9,307,476

55,288





9,307,476

55,288

Total temporarily impaired securities

$

49,334,985

$

375,520

$

22,226,361

$

403,685

$

71,561,346

$

779,205

The investments in the
Companys investment portfolio that are temporarily impaired as of December 31, 2004 consist of debt securities issued by U.S. government corporations and agencies and corporate debt with strong credit ratings. The unrealized losses in the
above table are attributable to changes in market interest rates. Company management does not intend to sell these securities in the near term, and due to the securities relative short duration, anticipates that the unrealized losses that
currently exist will be reduced going forward.

The following is a
summary of activity in the allowance for loan losses account for the years ended December 31:

2004

2003

2002

BALANCE, beginning of year

$

3,898,650

$

3,875,708

$

4,405,385

Charged-off loans

(14,737

)

(86,642

)

(83,213

)

Writedowns of nonperforming loans transferred to loans held-for-sale





(604,686

)

Recoveries

60,540

9,588

38,222

Provision for loan losses charged to income

74,997

99,996

120,000

BALANCE, end of year

$

4,019,450

$

3,898,650

$

3,875,708

Certain directors and
executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 2004. Total loans to such persons and their companies amounted to $1,666,128 as of December 31, 2004. During 2004
principal advances of $899,028 were made and principal payments totaled $360,981.

The following is a summary of information regarding impaired loans, nonaccrual loans and accruing loans 90 days or more overdue:

December 31,

2004

2003

Nonaccrual loans

$

293,203

$

1,157,957

Accruing loans which are 90 days or more overdue

$



$



Impaired loans as of December 31,

2004

2003

Recorded investment in impaired loans at December 31

$

902,458

$

777,632

Portion of allowance for loan losses allocated to impaired loans

$

141,666

$

116,645

Net balance of impaired loans

$

760,792

$

660,987

Recorded investment in impaired loans with a related allowance for credit losses

In addition to total loans previously shown, the Company services loans for other financial
institutions. Participation loans are loans originated by the Company for a group of banks. Sold loans are loans originated by the Company and sold to the secondary market. The Company services these loans and remits the payments received to the
buyer. The Company specifically originates long-term, fixed-rate loans to sell. The amount of loans sold and participated out which are serviced by the Company are as follows as of December 31:

2004

2003

Sold loans

$

293,569,964

$

289,825,192

Participation loans

$

12,782,673

$

7,672,024

The balance of
capitalized servicing rights, net of valuation allowances, included in other assets at December 31, 2004 and 2003 was $2,281,309 and $2,334,473, respectively.

Servicing assets of $859,564, $1,837,297 and $1,141,341 were capitalized in 2004, 2003 and 2002, respectively. Amortization of servicing assets was
$944,959 in 2004, $1,293,748 in 2003 and $802,540 in 2002.

The
fair value of servicing assets was $3,021,319 and $2,945,009 as of December 31, 2004 and 2003, respectively. Following is an analysis of the aggregate changes in the valuation allowances for servicing assets:

2004

2003

Balance, beginning of year

$

61,115

$

178,548

Decrease

(32,231

)

(117,433

)

Balance, end of year

$

28,884

$

61,115

NOTE 5.

Premises and equipment:

Premises and equipment are shown on the consolidated balance sheets at cost, net of accumulated depreciation, as follows as of December 31:

2004

2003

Land

$

1,128,768

$

1,221,249

Buildings and premises

10,329,871

9,702,994

Furniture, fixtures and equipment

5,334,432

4,709,441

16,793,071

15,633,684

Less - Accumulated depreciation

7,092,594

6,327,856

$

9,700,477

$

9,305,828

Depreciation expense amounted to
$797,630, $949,931 and $976,746 for the years ending December 31, 2004, 2003 and 2002, respectively.

NOTE 6.

Deposits:

The following is a summary of maturities of time deposits as of December 31, 2004:

Deposits from related parties held by the Bank as of December 31, 2004 and 2003 amounted to
$5,495,567 and $3,786,673, respectively.

As of December 31,
2004 and 2003, time deposits include $28,654,490 and $29,813,003, respectively of certificates of deposit with a minimum balance of $100,000.

NOTE 7.

Federal Home Loan Bank Advances:

Advances consist of funds borrowed from the Federal Home Loan Bank of Boston (FHLB).

As of December 31, 2004, FHLB advances totaled $75,000,000 with $55,000,000 maturing in 2005 and $20,000,000 maturing in May
2006. At December 31, 2004 the interest rates on FHLB advances ranged from 2.05% to 3.09%. The weighted average interest rate at December 31, 2004 is 2.53%.

Advances are secured by the Companys stock in that institution, its residential real estate mortgage portfolio and the remaining U.S. government and
agency securities not otherwise pledged.

NOTE 8.

Securities sold under agreements to repurchase:

The securities sold under agreements to repurchase as of December 31, 2004 are securities sold on a short-term basis by the Bank that have been accounted
for not as sales but as borrowings. The securities consisted of U.S. Agencies. The securities were held in the Banks safekeeping account at Bank of America under the control of the Bank and pledged to the purchasers of the securities. The
purchasers have agreed to sell to the Bank substantially identical securities at the maturity of the agreements.

NOTE 9.

Income taxes:

The components of income tax expense are as follows for the years ended December 31:

2004

2003

2002

Current tax expense

$

2,785,294

$

2,459,668

$

1,663,388

Deferred tax expense

378,216

1,046,854

811,907

Total income tax expense

$

3,163,510

$

3,506,522

$

2,475,295

The reasons for the
difference between the tax at the statutory federal income tax rate and the effective tax rates are summarized as follows for the years ended December 31:

The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of
December 31:

2004

2003

Deferred tax assets:

Interest on non-performing loans

$

2,052

$

21,255

Allowance for loan losses

1,238,003

1,148,977

Deferred compensation

115,128

47,686

Deferred retirement expense

167,660

147,975

Accrued directors fees

56,175

55,021

Net unrealized holding loss on securities available-for-sale

89,705



Other

13,128

10,103

Gross deferred tax assets

1,681,851

1,431,017

Deferred tax liabilities:

Deferred loan costs, net of fees

692,011

524,996

Prepaid pension

954,206

986,839

Accelerated depreciation

819,319

688,181

Net unrealized holding gain on securities available-for-sale



48,520

Purchased goodwill

888,216

592,144

Mortgage servicing rights

903,626

925,873

Gross deferred tax liabilities

4,257,378

3,766,553

Net deferred tax liabilities

$

(2,575,527

)

$

(2,335,536

)

As of December 31,
2004, the Company had no operating loss and tax credit carryovers for tax purposes.

NOTE 10.

Stock compensation plans:

At December 31, 2004, the Company has four fixed stock-based employee compensation plans. Under the plans, amounts equal to 10% of the issued and
outstanding common stock of the Company were reserved for future issuance. As of December 31, 2004 all such options had been granted. Under the plans, the exercise price of each option equals the market price of the Companys stock on the date
of grant and an options maximum term is 10 years. Options are exercisable immediately.

There were no options granted in 2004. The fair value of each option granted in 2003 and 2002 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average
assumptions:

2003

2002

Weighted risk-free interest rate

4.36

%

5.13

%

Weighted expected life

10 years

10 years

Weighted expected volatility

22.3

%

19.3

%

Weighted expected dividend yield

2.78% per year

3.5% per year

No modifications have
been made to the terms of the option agreements.